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Michael Saltsman: The minimum wage is the War on Poverty’s least-effective tool

BY MICHAEL SALTSMANJanuary 08. 2014 5:52PMThis week marks the 50th anniversary of President Lyndon B. Johnson’s War on Poverty — a war that includes some battles won and others lost. Unfortunately, President Obama and Senate Democrats plan to use the occasion to amplify their call for a higher minimum wage, which is by far the least-effective tactic in our country’s ongoing attempt to reduce poverty.

It’s a lesson that state legislators learned the hard way fewer than 10 years ago. Between 2003 and 2007, 28 states voted to increase their minimum wage, hoping to make progress against poverty. But a careful review of Census Bureau data from economists at Cornell and American University produced less-than-encouraging results: These states saw no associated reduction in poverty rates.

It was a disappointing result for poverty advocates, but not surprising given past studies. In a 2008 review of the research on minimum wages and poverty, economists from the University of California-Irvine and the Federal Reserve demonstrated that almost all studies find that a higher minimum wage has either no effect on poverty or even increases it.

Two statistics help explain this counterintuitive finding. According to the Census Bureau, nearly 60 percent of individuals living in poverty don’t have a job and thus can’t receive a “raise” when the minimum wage increases. Instead, they just become more expensive to employ.

Among those who do work at the minimum wage, very few live in poor households. Forthcoming research from economists at Cornell University and San Diego State University finds that just 12.6 percent of employees covered by a $10.10 minimum wage live in poor households. By contrast, more than 60 percent live in households with a family income far above the poverty line.

If poor targeting were the only drawback of hiking the minimum wage, it’d be hard to object to raising it. After all, what’s the harm in helping a few middle or upper-middle class families while also helping the poor at the same time.

The old saying — if it sounds too good to be true, it probably is — applies here. Not only does the empirical evidence cast doubt on the impact of wage hikes on poverty, but it’s crystal-clear that a higher minimum wage carries with it consequences for the least-skilled and-experienced jobseekers.

One study published in the Journal of Human Resources looked specifically at the impact of a higher minimum wage on poor families. Some received a bump in hourly pay and were better off; others, however, lost hours at work or their job entirely and were worse off. The economists found that the “losers” from the wage hike outnumbered the “winners.”

If the President and Senate Democrats are interested in fighting the War on Poverty successfully, it would be a far better use of their time to improve and expand the Earned Income Tax Credit (EITC). The EITC boosts wages through the tax code instead of a mandate on employers, and — unlike the minimum wage — has an actual track record of reducing poverty. For instance, economists from the University of Georgia and San Diego State University found that each one percent increase in a state’s EITC reduces poverty by one percent.

Proponents for a higher minimum wage have recently claimed that taxpayers shouldn’t be supporting the wages of less-skilled workers via policies like the EITC. Instead, they say, the minimum wage should be high enough so that the EITC is unnecessary. It’s a silly argument: The minimum wage would have to be $20 an hour or higher to disqualify someone from receiving EITC, a level that even the most liberal of policy researchers wouldn’t get behind because of the adverse effect on jobs.

If helping the poor is the goal of the War on Poverty, then we should have a serious discussion about the best battle plan for achieving it. And the evidence is clear that the EITC, rather than the minimum wage, is the winning strategy.

Michael Saltsman is research director at the Employment Policies Institute.